Alan Greenspan: Market Flattening Out Will Put Dull Face on 2010 (Bloomberg Interview)

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Quotes from Video #2:
Alan Greenspan: "I think a very major part of this recovery that we have seen is a function of the huge spilling over of liquidity in the system which is coming from all of these capital gains, and it's hard to envision[?] going up 50% and then going up more. The odds are I have to assume that we flatten out, even though earnings are doing well as you know, and that flattening out is probably going to put some sort of dull face on 2010 but I don't look for an actual contraction [ ]...

Al Hunt: "But not 3-4%..."

Alan Greenspan: "I would doubt it."

Michael Moore On Capitalism Killing Newspapers

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"They'll blame it on the internet"... What are blogs considered??? It looks like capitalism transferred news reporting to a different medium which in my opinion is better and faster than ever before. So how is that bad?

Paul Tudor Jones Predicts 1987 Crash, Dow in Eighties v. Twenties, Portfolio Insurance Crisis (Derivatives)

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If this video sticks, Paul Tudor Jones and his team look at correlations between the 1920s and 1980s, predicting the 1987 crash. From Trader: the Documentary in 1987.

*I wanted to add this an excerpt from a Paul Tudor Jones interview in 2000. He mentioned "there was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance". Sounds similar to the 2008 credit default swaps accident.

"Q: Can you give an example?

Paul Tudor Jones: Certainly. The one on a percentage basis that's been the most profitable for me was the crash of 1987. There was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance that essentially meant that when stocks started to go down it was going to create more selling because the people who had written these derivatives would be forced to sell on every down-tick. So it was a situation where you knew that if you ever got to a point where the market started to go down that the selling would actually cascade instead of dry up because of the measure of these derivative instruments that had been written. And in the crash of '87 you had an overvalued market and you also finally had a situation where every down-tick would create more selling and I think I understood the dynamics of that. The crash was something that was imminently forecastable to somebody that understood the measure of derivatives and how large they had grown in such a relatively short period of time and the impact that it would have on a relatively unknowing and na'e market. And the same exact thing happened in 1990 in Japan." Full interview here

$GLD, $TLT, $UUP - Something Has To Give Here

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Something has to give with GLD, TLT and UUP. Looking at the 3 month chart UUP (the US Dollar long ETF)has been trending lower with TLT (20+ Treasury bonds) and GLD (gold ETF) moving higher. If there is runaway inflation positioning why is TLT catching a bid. If there's deflation going on why is UUP selling off. Those questions will be answered soon and will allow a nice trade imo. As of 12:01 eastern time today, $TLT is now unchanged, $GLD is up 1.09% and $UUP is down -.57%.

GLD, TLT, UUP 3 Month Chart (Courtesy of
5 Day Chart (Courtesy of
This sounds right: "RT @Infovestment item of the day is crude oil,the fantasy has once again hijacked all markets,it suppresses the USD and lifts all commods"

Google Wave Demo Video, I Like Website Embed Feature

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I always wondered why Gmail didn't allow embedded Youtube videos. I think Google Wave fills that void. The team in the video said if email was invented today it would be like Google Wave. From their site:
"Google Wave is an online tool for real-time communication and collaboration. A wave can be both a conversation and a document where people can discuss and work together using richly formatted text, photos, videos, maps, and more."

It is very cool because it brings in other social networks, including Twitter, and Waves have an embedding feature for websites and blogs. I would like to embed charts and videos on this blog and have other people add their own charts, videos and comments below the post. They wouldn't have to be at the blog to comment which is the best part. Google Wave looks very cool and I'd like to try it out.

JJC, Comex Copper at Trend, Moving Averages, COT Inflection (9/28)

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DV is watching the Comex Copper December Futures contract and JJC (IPATH UBS COPPER ETN). Both appear to be at the current uptrend line and below the 50day moving average. Copper is a huge recipient of the global reflation bid at this point and if there is a correction, copper could fall (opinion of course). If JJC breaks below trend it could hit 34.30 then 31.30 depending on catalysts. Look at the big volume spikes on down days.. The Dec Comex Copper future looks the same. Also if the 20dma crosses the 50dma to the downside that could bring downside momentum. $2.50 and $2.25 look like targets if downside movement takes over. These levels aren't officially broken yet, but I'm watching Copper.

JJC (Courtesy of

Copper Comex Dec Future (Courtesy of Optionsxpress)

More on Copper's commitment of traders. From this chart from net commercial hedgers vs. large speculators open interest is around par. Large speculative traders are a tiny bit short while commercials and small speculators are a tiny bit long. These levels aren't off the charts like February so a new trend has to tip large specs one way or another to profit off of price, unless I'm off here.

Copper Commitment of Traders (Courtesy of

UPDATE 1-Chile's Sonami sees 2010 avg copper price $2.50/lb (Reuters)
Copper Retreats On Chart Selling After Inventory, Homes Data (WSJ, 9/24)
Shanghai copper falls on lower LME, weak equities (Metal Bulletin)
Copper May Drop in London as Inventories Rise, Dollar Gains (Bloomberg)
Pricey metal (Business Standard)
The importance of copper: Panic and recovery (Resource Investor)

$TLT Above Resistance, Hedging Market or "Stern" Fed?

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I'm watching TLT break above resistance heading toward 100, $UUP (USD Long ETF) testing resistance and GLD, SPY bouncing off of support, something has to give here. I find TLT's strength here interesting. This strength could be hedging a market/reflation trade correction or it could be betting on the Fed. Read this Reuters article. It noted Kevin Warsh's oped piece in the WSJ and it's "stern" tone on fighting inflation. IMO, last thing we need right now is another inverted yield curve.
"The reasoning behind the disparate paths was clear enough. If investors bet short-term rates will rise quickly, then they feel comfortable about the longer-term path of inflation, making them feel better about holding bonds that mature in seven years or more." (Reuters)




Marc Faber Sees Stock Market Correction, Fiscal Debt Crisis (Bloomberg Interviews)

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Here are more interviews with Dr. Evil, Dr. Doom Marc Faber on Bloomberg Television. He thinks there will be a rebound in the US Dollar and a correction in stocks and gold. So that is where Doc Doom stands in the short term. Bloomberg video link. Here is the underlying article: Marc Faber Says Stocks Have Likely Peaked for 2009 (Bloomberg).

Here's a three part interview from September 22, 2009. "The next crisis will bring down the entire capitalistic system". Fast forward to 5:43.

S&P and Oil Performance Gap, Will SPX Follow Oil Lower? (Charts)

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First off how about those DEC Crude Oil $60 Puts! I wrote about crude's inflection point two days ago. Oil broke down and premium spiked on the $60 Dec put, which is up 117% since that post (1.09 to 2.37). For those who speculated or hedged with puts, congrats. $WTIC spot (W.Texas Crude Oil) declined 8.18%. It broke the 50 day moving average and could test $60 support eventually. The 200 day moving average is at 56.56. Traders could retest the 50dma (now resistance) first, we'll see.

West Texas Crude Oil (Courtesy of

The market is starting to roll over with Crude. During the past month W. Texas crude ($WTIC) declined 8.5% while the S&P gained 2.2%. Since oil and economic growth are directly related the 10.7% performance gap should, in my opinion, get filled sooner or later. Will the market take oil's lead here or could this possibly be a fake dollar denominated sell off.

Fed FOMC Statement, Scales Back TAF, TSLF (9/23-9/24)

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The Fed plans to "gradually scale back facilities in response to continued improvements in financial market conditions". Let the unwind begin?

Release Date: September 23, 2009
For immediate release

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.


Release Date: September 24, 2009
For release at 10:00 a.m. EDT

The Federal Reserve on Thursday announced schedules for operations under the Term Auction Facility (TAF) and the Term Securities Lending Facility (TSLF) through January 2010 and other information related to those facilities.

These schedules are consistent with the intention indicated in the Federal Reserve's June 25 press release to gradually scale back these facilities in response to continued improvements in financial market conditions.

The schedules also take account of the possibility that market pressures could be heightened over year-end. As noted in previous announcements, the Federal Reserve remains prepared to expand its liquidity operations more generally should financial market conditions deteriorate materially.

Schedules are attached.

Term Auction Facility

Under the TAF facility, to date the Federal Reserve has reduced offered amounts from a peak of $150 billion per auction to $75 billion per auction as conditions in short-term funding markets have continued to improve. Under the schedules announced Thursday, the Federal Reserve will continue to offer $75 billion per 28-day auction through January in order to ensure that an adequate volume of funding is available in the period leading up to year-end and over year-end. Reductions in the sizes of those 28-day operations are expected to resume early next year. The amounts offered under the existing cycle of auctions of 84-day funds will be reduced to $50 billion effective in October and to $25 billion in November and December, and the maturities of those operations will be reduced. The purpose of shortening the maturities is to align the maturity dates of those operations with the maturities in the cycle for 28-day funds. With the completion of that transition, the auction schedule will be converted by early next year to a single cycle of 28-day funds offered every 28 days.

Over the next several months, the Federal Reserve will assess whether to maintain a TAF on a permanent basis and will publish a request for public comment on a range of possible structures for a permanent TAF.

Term Securities Lending Facility

As announced on June 25, the Federal Reserve has discontinued Schedule 1 TSLF operations and TSLF Options Program operations. It has also reduced the frequency and size of its Schedule 2 TSLF operations. Consistent with recent further improvements in conditions in secured financing markets, the amounts offered in TSLF auctions will be scaled back further from their current size of $75 billion. As indicated in the attached schedule, TSLF offerings will be reduced to $50 billion in the October auction and to $25 billion in the November, December, and January auctions in the current 28-day cycle of auctions.

Peter Schiff Expects Dow/Gold Ratio to Equal 1!

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Peter Schiff was on Tech Ticker today.. He thinks the Dow/Gold ratio could equal 1 and he sees Gold at 5,000/oz! The ratio is currently trading at 9.77/1. Below I provided a chart.

Dow:Gold Ratio (Courtesty of

Marc Faber is Bearish on Dollar, Prefers Gold and Stocks With Inverse Correlation

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Marc Faber is not bullish on the Western world compared to emerging economies. There will be negative consequences as a result of the Fed printing money and the $2 trillion fiscal deficit. Faber is highly confident there will be an economic collapse after this reflationary boom. He believes the standard of living will decline due to inflation and Governments will go to war to divert attention away from the public. Damn... But he's basically saying ride the reflation wave until all hell breaks loose.

Source: Yahoo Tech Ticker

It's interesting that he switched his view on the Dollar. On August 15 Faber thought the US Dollar would rally for a few months with a market correction. It could still pan out. He did acknowledge the risk of the "Fed being a money printer". From this interview on 9/24 he said just that, before the economic collapse the S&P/US Dollar pair trade will move higher given the inverse correlation. He said you can protect yourself from dollar depreciation by buying real assets (commodities). As for stocks he likes Chesapeake Energy to take advantage of an eventual rebound in natural gas prices and Nova Gold.

I'm stocking up on Macbook Pros, Verizon internet cards, canned food, farm land and a glock.

Oil Put Options, MACD, RSI, Implied Volatilities, OVX Update

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Watch oil here..

"Oil Options Hit Highs as Verleger Predicts 44% Plunge (Update3)

By Alexander Kwiatkowski and Grant Smith

Sept. 21 (Bloomberg) -- Oil traders are paying more than ever in the options market to protect against a plunge in crude prices.

The gap between prices of options betting on a decline and those that would profit from a rise in oil widened to a record 10 percentage points, according to five years of data compiled by Banc of America Securities-Merrill Lynch. Crude stockpiles in the U.S. are 14 percent larger than a year ago and OPEC is pumping 600,000 barrels a day more than the world needs, according to the International Energy Agency."

"“There’s all this heating oil with no place to go,” Philip Verleger, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a phone interview. “I’m fairly certain we’ll see prices in the $30s this year.”"

"While Verleger has dropped a forecast made in July that oil would sink to $20 a barrel, traders are anticipating a decline. The Nymex’s most popular option is the right to sell December crude at $60 a barrel, with 69,244 contracts outstanding, exchange data show. The right to sell at $50 a barrel is the second most widely held. The December 60 put option rose today 47 percent to $1.66."
(Full Bloomberg article)

Today the December $60 put closed at $1.09 with 67,502 open. Premium was pulled down since that Bloomberg article. For recent views on oil put/call implied volatility visit these blogs.

Oil Put Demand, That Is (Daily Options Report)
Volatility Skew in Crude Oil Options (Don Fishback)
Bloomberg Option Blooper (Sigma Options)

Crude ($WTIC) looks like it's trading in an ascending triangle which is bullish however it must break above $75 with conviction. A break below $69 would create a lower reaction low and be bearish for crude (with volume). Technical indicators are forming a symmetrical triangle around critical levels. For example the MACD (Moving Average Convergence Divergence) and RSI (Relative Strength Index) are at the 0 and 50 level respectively. A run above or below those levels will decide the direction of strength and momentum. Oil has been riding the 50 day moving average higher and must break below that level (69.50) to prove it can move lower.

$WTIC Chart Courtesy of

Another interesting chart is the Oil Volatility Index ($OVX) which is hitting 40 lows for the fourth time. The OVX has been in the 40-50 range since May with oil trading between 63-75.

OVX Courtesy of

Will the reflation trade (commodities, S&P, levered loans, risk) just pause and refresh or will it shake out longs at some point? But with what the Government is doing how could they ever be nervous? Crude oil inventories are still up year over year. Read the DOE report ending 9/11. Inventory data is set to be released today. The American Petroleum Institute showed a rise in inventories on 9/18. Oil Falls After Industry Report Shows Increase in Fuel Supplies (Bloomberg). Stay tuned..

ARBX Financial Trends Plus a Volume Spike (Hitting Switches at Arbinet)

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I saw a volume spike in Arbinet Corp (ARBX). Over 200,000 shares traded, a number not seen since April.

ARBX 4 Month Chart

DV analyzed Arbinet's financials on April 3 and here is an update. Quarter over quarter revenue and equity declines are leveling off and operating and cost improvements, along with a forex gain, helped out operating and net income this quarter. The operating and net income lines increased every quarter since 12/31/08 but they are still clocking losses. Net income is almost in the black at -967k. The charts below of total revenues, operating income, net income and equity use financial data from Yahoo Finance. Also price/sales(ttm)=0.14 and price/book(mrq)=1.14.

Restaurant Delevering Continues, Tishman On CRE (Video)

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Restaurant sector continues to delever and reorganize it's balance sheet.

Roseville developer shuts his T.G.I. Friday's restaurants (

Owner of 70 Jack in the Box restaurants seeks bankruptcy protection (

Alizadeh's Jack in the Box franchise forced to seek Chapter 11 (

Tavern on the Green Files for Chapter 11 (New York Times)

Bankruptcy Takes A Bite Out Of The Big Apple (WSJ Blogs)

Tishman, CEO of the Tishman Construction Corporation, discusses the commercial real estate industry on CNBC. Commercial Real Estate Is Next Bubble to Burst: Tischman (CNBC).

More News On CRE:

Moody's: Commercial real estate prices falling (AP)

Investors Expect Bank Woes May Finally Jump-Start Distressed Buying Opportunities (CoStar)

BMO's Adornato on CRE, Capitalized REITs and Distressed Buys (Interview Aug 24)

LeFrak, Bair: Commercial Real Estate Loan Losses On Small Banks 2010 (Interviews)

$UUP Back In Early 2008 Channel (Charts, Call Option Interest)

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Here are recent UUP (US Dollar Bullish ETF) charts (2 year, 6 months, 2 months, 6 weeks). It is trading at 22.76. First off, looking at the 2 year chart UUP is back in the early 2008 channel (21.92-23.07). UUP has been trending lower since April and volume recently picked up in the ETF and it's call options. $UUP could retest the downtrend to fill that 23.14 gap but requires a strong catalyst to break above that trend. Below is open interest that stood out in the October, December and March 2010 options. Wondering if there's an ounce of speculation in the calls. UUP volume is hitting levels not seen since September 2008, right after Lehman went under. Right now there is a lot of pressure on the USD, from carry trades (1, 2) to shorts betting against USD dilution. However it is interesting that UUP short interest ending on 9/1 was down 52% from 1.53 million shares short to .72 million. Watch the daily updated $UUP chart below to scope out a potential trade on an upside trend break, or watch it die. Mo' Money, Mo' Problems Bernanke!!

October $23 Call, 14,879 open at 0.25
October $24 Call, 19,563 open at 0.10
October $24 Put, 2,713 open at 0.50

December $23 Call, 32,623 open at 0.45
December $24 Call, 24,127 open at 0.30
December $25 Call, 12,055 open at 0.15
December $23 Put, 3,418 open at 0.80
December $24 Put, 3,278 open at 1.52
December $25 Put, 1,030 open at 2.30

March $24 Call, 6,628 open at 0.55
March $24 Call, 32,029 open at 0.30
March $24 Put, 2,423 open at 1.75

Q2 Household Equity Up But Asset/Liabilities Ratio At 65 Year Low!

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Well reflation is working at some extent. Household net worth increased $2 trillion during the second quarter as DV expected mainly because the stock market rallied, housing prices ticked up month over month and debt declined a tad. This is interesting, from 2007 (around the peak) to 2009-Q2 household assets were down 14% ($78.2 to $67.2 trillion) while liabilities were only down 1.7% ($14.318 to $14.068 trillion)...

Peter Schiff for Senate 2010, Stop Mal-Investment!

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Lets make America worth something other than one big sub-prime credit. Stop the mal-investment, Peter Schiff for Senate, US Dollar Index to 185 by 2012!!

Trade Weighted US Dollar Index (St. Louis Fed)

Natural Gas: V-shaped Recovery Or $2.50 Retest, Karl Miller is Bearish

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If the economy sees a V-shaped recovery why not natural gas? Karl Miller, a globally recognized energy executive and institutional investor who bid on over $25 billion in energy assets in his career, thinks natural gas will correct to $2.50-$2.75 mmbtu. He wasn't bullish on MLPs either and thought equities were overvalued. Natural gas rallied hard to $3.80 today from an intraday low of $2.40 last week. Karl aside, is natural gas seeing a V-shaped recovery or another bear market rally? Below I provided the Natural Gas December 2009 Futures chart which is at an inflection (or deflection) point and the most recent EIA storage report which is bearish and must revert to the 5 year range for $NATGAS to see a sustained bid imho.

Energy Industry Icon Calls for Lower U.S. Natural Gas Prices; Industry at Record Storage Levels and No Demand Drivers

MIAMI, Sept. 15 /PRNewswire/ -- Karl W. Miller, a senior energy executive and institutional investor, today issued the following statement through his advisor VBCC, regarding the fact that U.S. natural gas is at record storage levels and overpriced.

Mr. Miller re-affirms expectations for natural gas to correct to the $2.50 to $2.75 mmbtu price range and will continue getting cheaper, as there will be no sustainable drivers either by natural gas fired electricity generation or industrial demand in the U.S. for the next 6-8 quarters.

The natural gas pipeline companies, master limited partnerships (MLP's) and natural gas producers will suffer substantially reduced earnings during the next 6-8 quarters and are substantially overvalued at the current time.

Oil is dollar based, but has no linkage to the price or demand of natural gas in the U.S.

Mr. Miller retains a sell recommendation on U.S. publicly listed renewable energy companies. He predicts we will see many of these companies, which are reliant upon massive government subsidies, state approval of pass through price increases, and highly levered fail and/or will be purchased at distressed prices. Source


Energy Industry Icon Calls Markets Overvalued and Overbought; Energy Commodities Especially at Risk

MIAMI, Sept. 15 /PRNewswire/ -- Karl W. Miller, a senior energy executive and institutional investor, today issued the following statement through his advisor VBCC, Markets Overvalued and Overbought; Energy Commodities Especially at Risk.

Mr. Miller agrees with Mr. Art Cashin's, director of floor operations at UBS Financial Services, statements today that the equity markets are substantially overvalued and overbought.

Earlier today, Mr. Miller predicted that natural gas will correct to the $2.50 to $2.75 mmbtu price range and will continue getting cheaper, as there will be no sustainable drivers either by natural gas fired electricity generation or industrial demand in the U.S. for the next 6-8 quarters.

In line with Mr. Cashin, Mr. Miller expects the natural gas pipeline companies, master limited partnerships (MLPs) and natural gas producers will suffer substantially reduced earnings during the next 6-8 quarters and are also substantially overvalued at the current time.

Mr. Miller retains a sell recommendation on U.S. publicly listed renewable energy companies. He predicts we will see many of these companies, which are reliant upon massive government subsidies, state approval of pass through price increases, and highly levered fail and/or will be purchased at distressed prices. Source

Natural Gas December 2009 Future (Courtesy of OptionXpress)

"Working gas in storage was 3,392 Bcf as of Friday, September 4, 2009, according to EIA estimates. This represents a net increase of 69 Bcf from the previous week. Stocks were 495 Bcf higher than last year at this time and 503 Bcf above the 5-year average of 2,889 Bcf. In the East Region, stocks were 163 Bcf above the 5-year average following net injections of 55 Bcf. Stocks in the Producing Region were 269 Bcf above the 5-year average of 830 Bcf after a net injection of 13 Bcf. Stocks in the West Region were 72 Bcf above the 5-year average after a net addition of 1 Bcf. At 3,392 Bcf, total working gas is above the 5-year historical range." source:

Working Gas in Storage Compared to 5 Year Range (

Natural gas has been a great trade during bear market rallies. At some point the 1.3 year downtrend will break and perhaps that is why 10,000 January 2010 Calls are open at $10. To be continued.

Track Active Vessels via Maps, Google Earth Satellite:

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Check out if you are interested in monitoring active ships on the waters globally. Definitely a great economic indicator if ships are DARK. They cover vessels across ports and regions around the globe. Download their Google Earth file and you can see if ships are active or not via satellite.

Posted by

Baltic Dry Index Exposed, Down 43% From June Highs (Chart)

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Perhaps the reason why the $BDI is down 43% since June? When is the next inventory rebuild?

Read ZeroHedge post for more info and pics.. and for updated pics

1) Thousands Of Rusting Ship Hulls Are A Fitting Tribute To The Speculative Market Bubble (Zero Hedge)

2) Revealed: The ghost fleet of the recession anchored just east of Singapore (DailyMail)

3) Baltic index drifts lower, cargo enquiry light (Reuters India)

4) Shipping Rates Seen Falling 50% on China, Fleet Size (Bloomberg, Aug 31)

S&P Above 38.2% Fibonacci Retracement, Eyeing 50% at 1,121

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Technical update: From October 2007 highs 1,576.09 to March 2009 lows 666.79, with the S&P currently trading at 1,053 it is above the 38.2% retracement level 1,014 and is eyeing the 50% retracement level at 1,121.44. Meaning the S&P is eyeing the level to recoup 50% of it's losses from the October 2007 high. It is riding the steep uptrend and there's a downtrend that hits just above the 50% level. Watching for a blow out top sooner or later.

S&P 500 (Courtesy of

US Dollar 3-Month Libor Cheaper Than Yen, Franc (Chart), 0.295%

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Remember when banks were frozen and 3M Libor spiked to 4.75% on October 9, 2008? Remember it was a big relief when Overnight Libor declined 51% to 2.469% the next day? Now USD 3M Libor is at 0.29%! Perhaps Bernanke deserves some "props" for unfreezing credit lines for working capital. When looking at 3 Month Libor today across popular carry currencies, the USD is now cheaper than the Japanese Yen and Swiss Franc to fund higher yielding assets. Will funds continue to pile onto this trade and devalue the USD or will a catalyst widen yields and unwind the carry trade?

Other articles:
Dollar Near Weakest This Year on Record-Low Borrowing Costs (9/15/09)
Dollar Diminishing Makes U.S. Favorite for High-Yield (9/14/09)
Lord Lamont: Dollar As Carry Currency Is Risky Phenomenon (blog post today)

For Libor charts go to US Dollar 3M Libor, Yen 3M Libor, Franc 3M Libor.

Rick Santelli and Liesman Argue On Lehman's Anniversary

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Hell yeah Rick!

Previous clips:

Rick Santelli and Traders Rally for Capitalism at the Chicago Board of Trade (CBOT)


Liesman vs. Santelli Regarding "Dumb Things"!

Lord Lamont: Dollar As Carry Currency Is Risky Phenomenon (CNBC)

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Former British Chancellor Lord Lamont was on CNBC with Jim Rogers this morning. Jim is still banking on a currency crisis or terrible inflation and mentioned the risk of protectionism and dealing with Central Europe's horrible loans.

Lord Lamont said we've seen the end of fear and output falling but the road ahead will not be a strong recovery because there is still debt deflation in the system and banks will be cautious to lend. At the end Lamont said the US Dollar becoming a carry currency is a risky phenomenon. By the way, Germany just issued $4 Billion in Dollar Denominated bonds.

Nassim Taleb Speaks Before Congress on Value-at-Risk Model Defects

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Nassim Taleb (Fooled by Randomness speaks before congress on the defects of modeling complex systems.

Bank of China's Zhu Min Bloomberg Interview (9/10/09)

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I couldn't embed the full interview, the full video is here.

Quick points from the interview:
  • Plenty of infrastructure projects in China to soak up liquidity
  • Risk of asset bubbles forming due to ample liquidity
  • Money needs to go to real projects
  • Wall Street feels like the crisis never happened (over-myopic)
  • Financial crisis stabilized from a cliff drop
  • At the end he said: The real economic crisis is just starting

Wall Street Is ‘Myopic,’ Bank of China’s Zhu Says (Bloomberg)
Bank of China’s Zhu Sees ‘Bubbles’ in Asset Markets (Bloomberg)
China’s New Lending Quickens, Money Supply Rises by Record (Bloomberg)

More analysis by Andy Xie (Former Economist at Morgan Stanley):
Andy Xie: Shanghai Index Fairly Valued At 2,000, Could See Bounce (Video)

FXI Put Protection, Andy Xie On China's Bubble

Input Prices Rise Globally (ISM, JPM Global PMI, HSBC China PMI)

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Tonight DV Economics will look at backward looking data, the U.S PMI, JP Morgan Global PMI and CLSA/HSBC China PMI report (Purchasing Manager's Index). The U.S ISM report showed decent growth in Manufacturing, New Orders and Input Prices but a contraction in Employment as expected. The JPM Global PMI and China PMI showed similar growth. It looks like the global stimulus effort reflated crude goods (commodities) to manufacturing inputs successfully. Will input price inflation spread to producer-finished goods and consumer prices?? I charted input price trends below.

China Rubber Industry Association Responds To Tire Tariff

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If you've been reading the news lately, tariffs and duties on Chinese steel and tire imports have been enforced by the Obama Administration. The China Rubber Industry Association responded to Obama today (below). Prof. Perry at Carpe Diem does a simple economic analysis and cost v. benefit on the tire tariff. Bush had a tariff on imported steel back in 2003 but lifted it after 20 months. Last thing we need right now is trade disruption.

Puts Active On XLF and Regional Banks For Next Week

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Yesterday was an interesting day in XLF. Fred Ruffy of saw that 108,000 traded on the September $14 Call at $0.15. Fred mentioned this on Twitter along with a 50k ratio put spread on $WFC. Open interest increased today over 100k so the trade wasn't closing out an existing seller, was it a new seller?? The trade could be hedging a potential head and shoulders top which could eventually test the $13.88 neck line. If it was bought-to-open, the $1.62 million (108k*100*.15) used to buy these contracts have 5 business days to exercise below $13.85 or sell out on a volatility spike. It is currently trading at $14.54.

Check Out Nanosolar's Panel Assembly Factory (Video)

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Is solar the next big thing?

Nanosolar Completes Panel Factory, Commences Serial Production (
An Overview of Nanosolar’s Cell Technology Platform (White Paper, 9/09)

ht beanieville

Hecla Mining Breaks Out, Calls Up On Silver Production, Cost Outlook

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Hecla Mining ($HL) spiked 11% today on it's revised silver production and cash cost outlook. They also mention the Lucky Friday Mine. Hecla is riding the silver train at the moment (more below).

Hecla Updates Guidance Increasing Silver Production and Lowering Cash Costs Per Ounce

COEUR D’ALENE, Idaho--(BUSINESS WIRE)--Sep. 9, 2009-- Hecla Mining Company (NYSE:HL) is pleased to announce improved operating performance, increased exploration spending and an update on the development plans for the Lucky Friday mine.

Hecla’s operations continue to show marked improvement as a result of previously implemented plans which focused on lowering cash costs through cost-cutting and optimization programs. Increased production volumes, improved grade control measures and greater availability of hydroelectric power at the Green Creek mine have led to lower operating costs in 2009 compared with 2008. Prices for by-product base metals have also rebounded sharply since early June which helps to reduce operating costs at both the Greens Creek and Lucky Friday mines.

As a result of these programs and improved business conditions, Hecla is revising anticipated full year 2009 silver production to 10.5 to 11 million ounces from 10 to 11 million ounces. The estimate of cash cost per ounce of silver has been reduced by a third to less than $3.00 per ounce of silver from the previously announced estimate of $4.50 per ounce.

Hecla Mining Company President and Chief Executive Officer Phillips S. Baker, Jr., said, “If prices for metals remain at their current levels we should generate substantially more operating cash flow this year than anytime in Hecla’s hundred year history. Second quarter cash flow was $20 million and, importantly, compares favorably with our competitors who produced more silver but at higher operating costs thereby providing less operating margin.”

Baker continued, “Our people have done an excellent job of managing the operations. At Greens Creek we lowered operating costs by increasing throughput while the ore grade at the Lucky Friday mine has improved approximately 10% as a result of grade control measures. In addition, we have also benefited from higher by-product metal prices. I am excited that we have announced a second reduction in our cost guidance and I am confident that we should have full-year cash costs below $3.00 per ounce. These are important achievements and I believe that the location of our mines in the U.S., Hecla’s leverage to a rising silver price and the cash flow generation that we are seeing today makes Hecla an attractive investment.”


As part of Hecla’s commitment to grow its production and reserves in its four district-controlling land packages, Hecla has expanded planned exploration expenditures almost 40% to $9.5 million for the year with $7 million being spent in the second half of 2009.

Surface drilling is already underway on the Northeast Contact target at the Greens Creek mine, on the Vindicator property east of the Lucky Friday mine and on the Bulldog vein which is part of the San Juan joint venture in Colorado where Hecla owns a 70% interest. The remaining 30% of the joint venture is held by Emerald Mining and Leasing, LLC and Golden 8 Mining, LLC. Surface drilling should commence at the San Sebastian property in Mexico in the fourth quarter. By early October, nine drill rigs are expected to test our projects in Alaska, Colorado, Idaho and Mexico.


Preliminary work on studies underway at the Lucky Friday mine in Idaho indicates that mine-life can be materially extended under several alternatives. The studies are examining deep development options to mine beyond 2015 under different capital and development schedules. The lower capital alternative could extend mine-life at Lucky Friday by four years for an estimated investment of less than $10 million. The capital required would be deployed to increase the cooling capacity of the ventilation system and for mine development using existing infrastructure.

A second scenario, requiring a greater capital investment is currently the subject of a feasibility study that will detail long-term infrastructure development of the mine that could extend mine-life by several decades. The feasibility study started earlier in the year... Continued here.

Hecla's Home Page can be accessed on the Internet at

Source: Hecla Mining Company

DV is revisiting a Hecla post from May 20. Hecla is up with silver due to inflation expectations and a weak dollar¹. There is still business risk involved with this company, they recently deferred preferred dividend payments to conserve cash and to not violate a bank credit agreement. Earlier this year they had to amend credit agreements and raise equity to pay down debt. Since April look at the HL vs. SLV, UUP (Silver ETF, US Dollar ETF) chart.

HL/UUP/SLV (Courtesy of

Back in May Dvol thought the size open in Hecla's back-month calls was interesting. If you revisit the post on May 20 there were 67,000 January 2010 calls open at the $2.50 strike for a $1.05 and 19,000 calls open at the $5.00 strike for $0.36. Fast forward to today, with spikes and corrections along the way, Silver and Hecla both broke out and Hecla's stock is up 31%, the January 2010 $2.50 call is up 71% and the $5.00 call is up 39% (the $5.00 call could have been sold in a spread not sure). Also different time frames tell a different story, HL spiked at the end of May but corrected in the 2s in June/July. It closed at $4.20 today and if silver tanks here, watch out!

Hecla Mining Stock (HL)

Hecla Mining January Calls (Courtesy of Yahoo Finance)

No recommendation going forward. These small caps are high risk. DV occasionally tries to find valuation and/or turnaround plays in small to mid cap stocks. Here are previous posts on Thinkorswim Group before the TD Ameritrade buyout, Skyworks Solutions 1, 2 in February, Arbinet Corp in April and Hecla in May.

Pros and Cons of High Frequency Trading (Larry Tabb of Tabb Group)

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Interesting video from Larry Tabb also spoke at the Money:Tech Conference in early 2008 before HFT was even an issue. Adam Sussman of TABB was also interviewed recently on Tech Ticker. I remember hearing Sussman talk about dark pools in early '08 at a P&I conference....

Full Obama Health Care Speech Video/Text (9/9/2009)

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Text of President Barack Obama's address to Congress on health care reform Wednesday, as prepared for delivery and provided by the White House.


Madame Speaker, Vice President Biden, members of Congress, and the American people: When I spoke here last winter, this nation was facing the worst economic crisis since the Great Depression. We were losing an average of 700,000 jobs per month. Credit was frozen. And our financial system was on the verge of collapse.

As any American who is still looking for work or a way to pay their bills will tell you, we are by no means out of the woods. A full and vibrant recovery is many months away. And I will not let up until those Americans who seek jobs can find them; until those businesses that seek capital and credit can thrive; until all responsible homeowners can stay in their homes. That is our ultimate goal. But thanks to the bold and decisive action we have taken since January, I can stand here with confidence and say that we have pulled this economy back from the brink.

I want to thank the members of this body for your efforts and your support in these last several months, and especially those who have taken the difficult votes that have put us on a path to recovery. I also want to thank the American people for their patience and resolve during this trying time for our nation.

But we did not come here just to clean up crises. We came to build a future. So tonight, I return to speak to all of you about an issue that is central to that future -- and that is the issue of health care.

I am not the first president to take up this cause, but I am determined to be the last. It has now been nearly a century since Theodore Roosevelt first called for health care reform. And ever since, nearly every president and Congress, whether Democrat or Republican, has attempted to meet this challenge in some way. A bill for comprehensive health reform was first introduced by John Dingell Sr. in 1943. Sixty-five years later, his son continues to introduce that same bill at the beginning of each session.

Our collective failure to meet this challenge -- year after year, decade after decade -- has led us to a breaking point. Everyone understands the extraordinary hardships that are placed on the uninsured, who live every day just one accident or illness away from bankruptcy. These are not primarily people on welfare. These are middle-class Americans. Some can't get insurance on the job. Others are self-employed, and can't afford it, since buying insurance on your own costs you three times as much as the coverage you get from your employer. Many other Americans who are willing and able to pay are still denied insurance due to previous illnesses or conditions that insurance companies decide are too risky or expensive to cover.

We are the only advanced democracy on Earth -- the only wealthy nation -- that allows such hardships for millions of its people. There are now more than 30 million American citizens who cannot get coverage. In just a two year period, one in every three Americans goes without health care coverage at some point. And every day, 14,000 Americans lose their coverage. In other words, it can happen to anyone.

But the problem that plagues the health care system is not just a problem of the uninsured. Those who do have insurance have never had less security and stability than they do today. More and more Americans worry that if you move, lose your job, or change your job, you'll lose your health insurance too. More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won't pay the full cost of care. It happens every day.

One man from Illinois lost his coverage in the middle of chemotherapy because his insurer found that he hadn't reported gallstones that he didn't even know about. They delayed his treatment, and he died because of it. Another woman from Texas was about to get a double mastectomy when her insurance company canceled her policy because she forgot to declare a case of acne. By the time she had her insurance reinstated, her breast cancer more than doubled in size. That is heartbreaking, it is wrong, and no one should be treated that way in the United States of America.

Then there's the problem of rising costs. We spend one-and-a-half times more per person on health care than any other country, but we aren't any healthier for it. This is one of the reasons that insurance premiums have gone up three times faster than wages. It's why so many employers -- especially small businesses -- are forcing their employees to pay more for insurance, or are dropping their coverage entirely. It's why so many aspiring entrepreneurs cannot afford to open a business in the first place, and why American businesses that compete internationally -- like our automakers -- are at a huge disadvantage. And it's why those of us with health insurance are also paying a hidden and growing tax for those without it -- about $1000 per year that pays for somebody else's emergency room and charitable care.

Finally, our health care system is placing an unsustainable burden on taxpayers. When health care costs grow at the rate they have, it puts greater pressure on programs like Medicare and Medicaid. If we do nothing to slow these skyrocketing costs, we will eventually be spending more on Medicare and Medicaid than every other government program combined. Put simply, our health care problem is our deficit problem. Nothing else even comes close. Continued....


Mary Bartels of BofA/Merrill Sees 15-20% Downside in S&P 500 (Video, Chart)

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It is time for TARP banks to take their TARP profits!?

Mary Ann Bartels, head technical analyst at Bank America Securities/Merrill Lynch, said the S&P may correct 15-20%. She's watching 5 "trip wires" to catalyze a market correction. 3 out of the 5 trip wires went negative. She sees this current rally as a "breadth thrust" like '75 and '82 when the market rallied over 60% and had a 14% correction. Since there is no uptick rule today she sees more volatility on the downside. The correction would be part of a "base building" process. She's also bullish on commodities and sees a possible head and shoulders bottom in gold. If it breaks out of the reverse H&S pattern $1,300 is in the cards. Watch the full BloombergTV video interview.

  1. China market correction
  2. Buy volume deteriorating, higher volume on sell offs; Negative breadth
  3. Investor Intelligence Survey: Pessimism at 2007 lows
  1. Percent of NYSE stocks above 200 day moving average at 91%, highest in 5 years
  2. Tech outperformance
What this correction would look like..

U.S. Stocks at Risk for 20 Percent Decline: Technical Analysis (Bloomberg Article).

DV agrees with Mary and sees a correction once this "breadth thrust" loses it's supply of Pez

Bullish Set Up For US Dollar? 24K UUP December 23 Calls Trading

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The Dollar is getting BEAT DOWN with the market rally. There is interesting volume today in the UUP December $23 Call (24,010 traded today w/3,299 open). 22,791 UUP December $24 calls are also open killing all open interest in the puts. Not sure if those were shorts or what. There are also 31,578 March 2010 calls open at the $26 strike killing all put interest as well. Just something to know about if this thing bases out and/or the market "trips".

UUP December Option Chain (Courtesy of Yahoo Finance)
UUP March Option Chain (Courtesy of Yahoo Finance)
UUP 3 Year Chart, clear downtrend

50 Cent on Power Lunch (CNBC Video) and First Song Ever Made

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Rapper 50 Cent talks about the rap industry, his new book "The 50th Law" (co-authored by Robert Greene), $100 million he made on the Vitamin Water buy out and the recession. He has an estimated net worth of $150 million!

Santelli vs. Pento on Gold, Charts: CRB, Gold, Dollar, 30Y Treasury

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On September 3, Michael Pento of Delta Global Advisors and Rick Santelli argued about the price of gold going forward on CNBC. Gold broke out recently and is now fighting the $1,000 resistance level.

Pento: Gold will hit $1200 by the end of the year, mentions ISM prices paid component surge, China PMI, real interest rates plummeting, commodities in CRB index rising which is 40% CPI.

: Next big move in gold will be a sell off, sees recent gold move as a technical break out, short covering, 3 day charts on dollar, gold and bonds tell a different story, dollar did nothing.

There are definitely input cost pressures globally which I'll touch on next but Rick Santelli makes an interesting point about intermarket relationships. I provided a performance comparison between Gold, the CRB Index (commodities), US Dollar and the 30 Year Treasury Bond from August 13th. Over that time period CRB lost 6.63%, US Dollar lost 0.31%, 30 Year Treasuries gained 1.82% and Gold gained 4.14%. Interesting.... *Updated chart, didn't include gold performance.

George Soros Theory of Reflexivity MIT Speech 1994

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Via Ritholtz

Delivered April 26, 1994 to the MIT Department of Economics World Economy
Laboratory Conference Washington, D.C.

When Rudi Dornbusch invited me to speak at this conference, he gave me a totally free hand in deciding what I wanted to talk about. Well, I want to discuss a subject which fascinates me but doesn’t seem to interest others very much. That is my theory of reflexivity which has guided me both in making money and in giving money away, but has received very little serious consideration from anybody else. It is really a very curious situation. I am taken very seriously; indeed, a bit too seriously. But the theory that I take seriously and, in fact, rely on in my decision-making process is pretty completely ignored. I have written a book about it which was first published in 1987 under the title The Alchemy of Finance; but it received practically no critical examination. It has been out of print for the last several years but demand has been building up as a result of my increased visibility, not to say notoriety, and now the book is being re issued. I think this is a good time to get the theory seriously considered.

I was invited to testify before Congress last week and this is how I started my testimony. I quote: “I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.” I did not have time to expound my theory before Congress, so I am taking advantage of my captive audience to do so now. My apologies for inflicting a very theoretical discussion on you.

The theory holds, in the most general terms, that the way philosophy and natural science have taught us to look at the world is basically inappropriate when we are considering events which have thinking participants. Both philosophy and natural science have gone to great lengths to separate events from the observations which relate to them. Events are facts and observations are true or false, depending on whether or not they correspond to the facts.

This way of looking at things can be very productive. The achievements of natural science are truly awesome, and the separation between fact and statement provides a very reliable criterion of truth. So I am in no way critical of this approach. The separation between fact and statement was probably a greater advance in the field of thinking than the invention of the wheel in the field of transportation.

But exactly because the approach has been so successful, it has been carried too far. Applied to events which have thinking participants, it provides a distorted picture of reality. The key feature of these events is that the participants’ thinking affects the situation to which it refers. Facts and thoughts cannot be separated in the same way as they are in natural science or, more exactly, by separating them we introduce a distortion which is not present in natural science, because in natural science thoughts and statements are outside the subject matter, whereas in the social sciences they constitute part of the subject matter. If the study of events is confined to the study of facts, an important element, namely, the participants’ thinking, is left out of account. Strange as it may seem, that is exactly what has happened, particularly in economics, which is the most scientific of the social sciences.

Classical economics was modeled on Newtonian physics. It sought to establish the equilibrium position and it used differential equations to do so. To make this intellectual feat possible, economic theory assumed perfect knowledge on the part of the participants. Perfect knowledge meant that the participants’ thinking corresponded to the facts and therefore it could be ignored. Unfortunately, reality never quite conformed to the theory. Up to a point, the discrepancies could be dismissed by saying that the equilibrium situation represented the final outcome and the divergence from equilibrium represented temporary noise. But, eventually, the assumption of perfect knowledge became untenable and it was replaced by a methodological device which was invented by my professor at the London School of Economics, Lionel Robbins, who asserted that the task of economics is to study the relationship between supply and demand; therefore it must take supply and demand as given. This methodological device has managed to protect equilibrium theory from the onslaught of reality down to the present day.

I don't know too much about the prevailing theory about financial markets but, from what little I know, it continues to maintain the approach established by classical economics. This means that financial markets are envisaged as playing an essentially passive role; they discount the future and they do so with remarkable accuracy. There is some kind of magic involved and that is, of course, the magic of the marketplace where all the participants, taken together, are endowed with an intelligence far superior to that which could be attained by any particular individual. I think this interpretation of the way financial markets operate is severely distorted. That is why I have not bothered to familiarize myself with efficient market theory and modern portfolio theory, and that is why I take such a jaundiced view of derivative instruments which are based on what I consider a fundamentally flawed principle. Another reason is that I am rather poor in mathematics.

It may seem strange that a patently false theory should gain such widespread acceptance, except for one consideration; that is, that all our theories about social events are distorted in some way or another. And that is the starting point of my theory, the theory of reflexivity, which holds that our thinking is inherently biased. Thinking participants cannot act on the basis of knowledge. Knowledge presupposes facts which occur independently of the statements which refer to them; but being a participant implies that one’s decisions influence the outcome. Therefore, the situation participants have to deal with does not consist of facts independently given but facts which will be shaped by the decision of the participants. There is an active relationship between thinking and reality, as well as the passive one which is the only one recognized by natural science and, by way of a false analogy, also by economic theory.

I call the passive relationship the “cognitive function” and the active relationship the “participating function,” and the interaction between the two functions I call “reflexivity.” Reflexivity is, in effect, a two-way feedback mechanism in which reality helps shape the participants’ thinking and the participants’ thinking helps shape reality in an unending process in which thinking and reality may come to approach each other but can never become identical. Knowledge implies a correspondence between statements and facts, thoughts and reality, which is not possible in this situation. The key element is the lack of correspondence, the inherent divergence, between the participants’ views and the actual state of affairs. It is this divergence, which I have called the “participant’s bias,” which provides the clue to understanding the course of events. That, in very general terms, is the gist of my theory of reflexivity.

The theory has far-reaching implications. It draws a sharp distinction between natural science and social science, and it introduces an element of indeterminacy into social events which is missing in the events studied by natural science. It interprets social events as a never-ending historical process and not as an equilibrium situation. The process cannot be explained and predicted with the help of universally valid laws, in the manner of natural science, because of the element of indeterminacy introduced by the participants’ bias. The implications are so far-reaching that I can’t even begin to enumerate them. They range from the inherent instability of financial markets to the concept of an open society which is based on the recognition that nobody has access to the ultimate truth. The theory gives rise to a new morality as well as a new epistemology. As you probably know, I am the founder—and the funder—of the Open Society Foundation. That is why I feel justified in claiming that the theory of reflexivity has guided me both in making and in spending money.

But is it possible to come up with a valid new theory about the relationship between thinking and reality? It seems highly unlikely. The subject has been so thoroughly explored that probably everything that can be said has been said. In my defense, I did not produce the theory in a vacuum. The logical indeterminacy of self-referring statements was first discussed by Epimenides, the Cretan philosopher, who said, “Cretans always lie,” and the paradox of the liar was the basis of Bertrand Russell's theory of classes. But I am claiming more than a logical indeterminacy. Reflexivity is a two-way feedback mechanism, which is responsible for a causal indeterminacy as well as a logical one. The causal indeterminacy resembles Heisenberg’s uncertainty principle, but there is a major difference: Heisenberg’s theory deals with observations, whereas reflexivity deals with the role of thinking in generating observable phenomena.

I am thrilled by the possibility that I may have reached a profound new insight, but I am also scared because such claims are usually made by insane people and there are many more insane people in the world than there are people who have reached a profound new insight. I wonder whether my insight has an objective validity or only a subjective significance.

That is why I am so eager to submit my ideas to a critical examination and that is why I find the present situation, where I am taken so seriously but my theory is not, so frustrating. As I have said before, the theory of reflexivity has received practically no serious consideration. It is treated as the self-indulgence of a man who made a lot of money in the stock market. It is generally summed up by saying that markets are influenced by psychological factors, and that is pretty trite. But that is not what the theory says. It says that, in certain cases, the participants’ bias can change the fundamentals which are supposed to determine market prices.

I ask myself, why did I fail to communicate this point? The answer I come up with is that I tried to say too much, too soon. I tried to propound a general theory of reflexivity at a time when reflexivity as a phenomenon is not even recognized. In retrospect, I think I should have started more modestly; I should have tried to prove the existence of reflexivity as a phenomenon before I tried to revise our view of the world based on that phenomenon. It can be done relatively easily, and the financial markets provide an excellent laboratory in which to do it. And that is what I should like to do here today.

What I need to do is to demonstrate that there are instances where the participants’ bias is capable of affecting not only market prices but also the so-called fundamentals that market prices are supposed to reflect. I have collected and analyzed such instances in The Alchemy of Finance, so all I need to do here is simply to enumerate them. In the case of stocks, I have analyzed two particular instances which demonstrate my case perfectly; one is the conglomerate boom and bust of the late 1960s, and the other is the boom and bust of real estate investment trusts in the early 70s. I cite may other instances, such as the leveraged buyout boom of the 1980s and the boom/bust sequences engendered by foreign investors. But these cases are less clear cut.

The common thread in the two instances I have mentioned is so-called equity leveraging; that is to say, companies can use inflated expectations to issue new stock at inflated prices, and the resulting increase in earnings per share can go a long way to validate the inflated expectations. But equity leveraging is only one of many possible mechanisms for transmitting the participants’ bias to the underlying fundamentals. Consider, for instance, the boom in international lending which occurred in the 1970s and led to the bust of 1982. In the boom, banks relied on so-called debt ratios, which they considered as objective measurements of the ability of the borrowing countries to service their debt, and it turned out that these debt ratios were themselves influenced by the lending activity of the banks.

In all these cases, the participants’ bias involved an actual fallacy: in the case of the conglomerate and mortgage trust booms, the growth in earnings per share was treated as if it were independent of equity leveraging; and in the case of the international lending boom, the debt ratio was treated as if it were independent of the lending activities of the banks. But there are other cases where no such fallacy is involved. For instance, in a freely-fluctuating currency market, a change in exchange rates has the capacity to affect the so-called fundamentals which are supposed to determine exchange rates, such as the rate of inflation in the countries concerned; so that any divergence from a theoretical equilibrium has the capacity to validate itself. This self-validating capacity encourages trend-following speculation, and trend-following speculation generates divergences from whatever may be considered the theoretical equilibrium. The circular reasoning is complete. The outcome is that freely fluctuating currency markets tend to produce excessive fluctuations and trend-following speculation tends to be justified.

I believe that these examples are sufficient to demonstrate that reflexivity is real; it is not merely a different way of looking at events; it is a different way in which events unfold. It doesn't occur in every case but, when it does, it changes the character of the situation. Instead of a tendency towards some kind of theoretical equilibrium, the participants’ views and the actual state of affairs enter into a process of dynamic disequilibrium which may be mutually self-reinforcing at first, moving both thinking and reality in a certain direction, but is bound to become unsustainable in the long run and engender a move in the opposite direction. The net result is that neither the participants’ views nor the actual state of affairs returns to the condition from which it started. Once the phenomenon of reflexivity has been isolated and recognized, it can be seen to be at work in a wide variety of situations. I studied one such situation in The Alchemy of Finance which was particularly relevant at the time the book was written. I called it “Reagan’s Imperial Circle.” It consisted of financing a massive armaments program with money borrowed from abroad, particularly from Japan. I showed that the process was initially self-reinforcing but it was bound to become unsustainable. A similar situation has arisen recently with the reunification of Germany, which eventually led to the breakdown of the European Exchange Rate Mechanism. The ERM operated in near- equilibrium conditions for about a decade before the reunification of Germany created a dynamic disequilibrium.

What renders reflexivity significant is that it occurs only intermittently. If it were present in all situations all the time, it would merely constitute a different way of looking at events and not a different way for events to evolve. That is the point I failed to make sufficiently clear in my book. I presented my theory of reflexivity as a general theory in which the absence of reflexivity appears as a special case. I was, of course, trying to imitate Keynes, who proposed his general theory of employment in which full employment was a special case. But Keynes proposed his theory when unemployment was a well-established fact, whereas I proposed the theory of reflexivity before the phenomenon has been recognized. In doing so, I both overstated and understated my case. I overstated it by arguing that the methods and criteria of the natural sciences are totally inapplicable to the study of social phenomena. I called social science a false metaphor. That is an exaggeration because there are many normal, everyday, repetitive situations which can be explained and predicted by universally valid laws whose validity can be tested by scientific method. And even historical, reflexive processes have certain repetitive aspects which lend themselves to statistical generalizations. For instance, the trade cycle follows a certain repetitive pattern, although each instance may have some unique features and there is a lot more to be gained from understanding the unique features than the repetitive pattern.

I have also understated my case by presenting reflexivity as a different way of looking at the structure of social events rather than a different way in which events unfold when reflexivity comes into play. I made the point that, in natural science, one set of facts follows another irrespective of what anybody thinks; whereas in the events studied by social science, there is a two-way interaction between perception and facts. I also drew a distinction between humdrum, everyday events in which the element of indeterminacy introduced by the reflexive connection can be treated as mere noise, and historical events where the reflexive interaction brings about an irreversible change both in the participants' views and the actual state of affairs. All this is very profound and very significant, but the really interesting undertaking is to study the difference between humdrum and historical events and to gain a better understanding of historical processes.

I have done a lot of work in that direction since I wrote The Alchemy of Finance, not so much in the financial markets as in the historical arena. I have come to distinguish between normal conditions and far-from equilibrium conditions. In normal conditions, there is a tendency for the participants’ views and the actual state of affairs to converge or, at least, there are mechanisms at work to prevent them from drifting too far apart. I call these conditions “normal,” because that is what our intellectual traditions—including philosophy and scientific method —have prepared us for. I contrast them with far-from- equilibrium conditions, where the participants’ views are far removed from the actual state of affairs and there is no tendency for the two of them to come together. I have always found the far-from-equilibrium conditions much more fascinating, and I have studied them both in theory and in practice.

There are two very different kinds of far-from-equilibrium conditions: one is associated with the absence of change, and the other with revolutionary change. These two opposite poles act as “strange attractors”—an expression with which has become familiar since chaos theory has come into vogue.

So we can observe three very different conditions in history: the “normal,” in which the participants’ views and the actual state of affairs tend to converge; and two far-from- equilibrium conditions, one of apparent changelessness, in which thinking and reality are very far apart and show no tendency to converge, and one of revolutionary change in which the actual situation is so novel and unexpected and changing so rapidly that the participants’ views cannot keep up with it.

Interestingly, the rise and fall of the Soviet system presents both extremes. During Stalin’s time, reality and dogma were very far apart, but both of them were very rigid and showed no tendency to come together. Indeed, the divergence increased with the passage of time. When the system finally collapsed, people could not cope with the pace of change and events spun out of control. That is what we have witnessed recently.

But the two extremes can also be observed in totally unrelated contexts. Take, for instance, the banking industry in the United States. After the breakdown of the banking system in the Great Depression, it became closely regulated and very rigid; but when the restrictions were relaxed, the industry swung to the other extreme and entered a period of revolutionary change. I can locate the transition point with great precision: it was on that evening in 1973 when the management of First National City Bank held an unprecedented meeting for securities analysts in order to promote the stock as a growth stock. The pattern in the rise and fall of the Soviet system closely parallels the pattern in the fall and rise of the American banking system.

These three conditions are perhaps better explained by using an analogy. The analogy is with water, which also can be found in nature in three conditions: as a liquid, a solid or a gas. The three historical conditions I am trying to describe are as far apart as water, ice and steam. In the case of H2O, we can define exactly the three conditions; it has to do with temperature. Can we establish a similar demarcation line among the three conditions of historical change? I believe we can, and it has to do with the values that guide people in their actions. But I am not yet ready to give a firm answer. That is the problem that I am currently working on. But I feel rather exposed in dealing with such an esoteric issue. I need to know whether what I have said so far makes any sense; that is why I have imposed on you by giving you this rather heavy theoretical lecture, and I would welcome your comments either here or on another occasion.

--George Soros.